Asset Allocation Between 25 Year Old And 67 Year Old (Other (Not Listed) Sample)

Instructions:

How would the asset allocation differ between a 25 year-old who is saving for retirement and a 67 year-old who is beginning retirement?Be sure to provide the following:Give a reasonable stock-to-bond ratio for each investor.Explain your allocation.Focus your discussion on the following:Asset allocationTime horizonAbility to assume riskEarning capacityIncome needs

Asset Allocation between 25-Year-Old and 67-Year-OldNameInstitutional Affiliation Asset Allocation between 25-Year-Old and 67-Year-OldBefore looking into asset allocation models for the 25-year-old and 67-year-old individuals, it is important to take into consideration the historical returns for assets, particularly stocks and bonds (Fagereng, Gottlieb, & Guiso, 2017). From the historical data presented in the charts below, it becomes evident that stock returns have always outmatched returns for bonds. The results, however, show that stocks are highly volatile; hence, their market prices are expected to change with bigger margins over time compared to the prices of bonds. The knowledge about historical returns and market volatility can be used to make coherent assumptions about the future when developing asset allocation model for the two individuals.

Figure 1: Historical Returns for Stocks (Financial Samurai, n.d.)

Figure 2: Historical Returns for Bonds (Financial Samurai, n.d.)According to Figure 1, there has been a decrease in yield for the 10-year bond since 1980. This means that the prices of these bonds have been growing for close to 35 years following the indirect relationship between yield and bond prices (Fagereng et al., 2017). Figure 2, on the contrary, shows that stocks have overcome bonds since 1994. The basis of asset allocation is that individuals have never obtained more than 20 percent in return on the bond. The only times the indexes became close to 20 percent was in 1991 and 1995 following the high inflation rates. Although the aggregate inflation is 2 percent and may grow higher based on the current business condition, the bond returns might grow closer to 20 percent but will not surpass that boundary. Based on the assumption of 20% threshold of bond returns, a